Welcome to the afternoon session of our hearing.

Our focus this morning was on the yuan’s value, China’s exchange rate policies, and relevant policy options for the U.S. Government.

This afternoon we shift focus, first to look at the dynamics of China’s strategies for attracting foreign investment and channeling both domestic and foreign resources into key industries and technologies. Many observers of China believe this topic, and not just the exchange rate question, is key to assessing the overall impact of China’s economic policies and development on the U.S. economy.

This afternoon we will be considering the factors behind the remarkable growth of manufacturing capacity in China, now labeled the "workshop of the world" for the 21^st century, and what the implications are for the U.S. economy. One obvious driving force is the global search for low-cost production of quality goods, which has led to increased domestic and foreign investment in expanding such production capacity in China. Low-cost labor is often the determining factor here. But other factors in this growth in capacity may stem from the Chinese Government’s own industrial policies — for example its designation of so-called "pillar industries" — as well as policy and financial support for key manufacturing, infrastructure, S&T and R&D projects. Other factors may be more related to globalization in general than China in particular, such as the way transnational corporations operate globally integrated manufacturing and distribution networks with China as an important node embedded in this web of production. Another key factor at work here is the speed with which Chinese manufacturing and R&D are moving up the value chain to encompass more technologically advanced products and research.

We will first hear from three expert witnesses who have studied the development of China’s export-oriented manufacturing sector and its connection to the global supply chain. Professor Peter Nolan of Cambridge University has written extensively about China’s connection to what he calls the Global Business Revolution. Professor Ed Steinfeld of MIT has researched China’s industrial policy and done case studies of large Chinese firms’ performance in the domestic and global marketplace. Kate Walsh, Senior Associate of the Stimson Center, has done field research and written a recent monograph on the growth of foreign-funded research and development activities in China. Each panelist comes at the question of China’s industrial and investment priorities and strategies from a different angle, and I expect we will obtain a good three-dimensional picture from their testimony and follow-on discussion.

In the second and final panel of the afternoon, we will hear testimony from four witnesses with differing perspectives on the question of how the U.S. economy is being affected by China’s exchange rate, industrial and investment policies and trends. Our panelists will be: Frank Vargo, of the National Association of Manufacturers; Thea Lee, of the AFL-CIO; Paul Craig Roberts, Chairman of the Institute for Political Economy and a former Assistant Secretary of the Treasury; and Willard Workman, of the U.S. Chamber of Commerce. I expect their statements and follow-up dialogue with Commissioners will reveal a broad range of views and different emphases on policy prescriptions.